This past week I received a phone call from a long-time acquaintance who called to invite me to meet for a cup of coffee. As a coffee lover I rarely turn down the opportunity to visit my favorite coffee spot here in California.
After spending twenty minutes catching up on recent personal and professional adventures (and misadventures), we got down to “business”. My friend, after 20 years in the corporate world, was ready to transform himself into an entrepreneur. He was looking to leverage the expertise and connections he had gained throughout his career to develop what I thought was a very interesting – and potentially high growth – concept. All he needed was a small investment by me and twenty of his closest friends and he would be off to the races.
As the Founder and CEO of a company that sells business planning and productivity software to entrepreneurs, I am presented with “investment opportunities” on a regular basis (I more often than not politely decline the proposal). Before I consider any opportunity, I go to the back of my walk-in closet and pull out my “Investors Hat”.
After a 10 minute overview of his concept, my friend asked me enthusiastically what I thought and if I was interested in investing in his business. Before I could answer his question, I needed to know more. As I started asking the questions that any experienced investors would ask, I could see his eyes glaze over and a sense of panic set in.
What did he really know about the market and opportunity? Did he really know what it would require to take this concept and turn it into a profitable enterprise capable of generating tens or hundreds of millions of dollars in revenue?
My intention was not to scare him or dissuade him from pursuing his dream. My goal was to get him to understand that building a business – and raising capital – takes more than just having an idea. It requires having a business plan that is based upon assumptions and strategies that have been researched and vetted.
Investors have hundreds of opportunities to invest their money, whether it is in a business, in real estate, in the stock market, or underneath their mattress. Your goal is to demonstrate that you have done your due diligence and to get them to feel comfortable with you and your business. They are placing their trust in you and your ability to do what you say you can do.
So how do you prove you know what you are talking about? How do you build trust with an investor who is ready and willing to give you the easy answer – NO?
Be ready to answer the following 20 questions. These are not the only questions you will be asked, but they are among the most common:
- Who are you?
- Why are you in business?
- What is the opportunity / need / current situation in the world?
- How big is the market?
- What will you sell?
- How is your business structured?
- How will you make money?
- Who else is doing the same thing?
- How do you compare?
- Who are your most important customers?
- How will you reach and inspire them to buy from you?
- Do you have any strategic partners who will help?
- Who are the people running your business?
- What experience do you/they have?
- Who else are you working with?
- Who are your advisors? Who is on your board?
- Where are you today / What have you accomplished?
- How much money do you need to start / grow?
- What will you do with the money? What’s the deal?
- When & how will investors make their money back?
As I ran through this list of questions with my friend I could see the panic subside and a new resolve appear. He realized he needed to take a step back, due his due diligence, and then complete a business plan. After going through these steps, he knew he would be ready to have a real investment discussion with those in his network. He thanked me for my time and advice and we agreed to talk in the near future.
Raising capital for a new business is never easy. However, if you do your due diligence and are prepared to answer tough questions from investors, you substantially increase your odds of success.